Reputations are fragile things and company reputations are no different, but in the brave new world of YouTube, Twitter and blogs their fragility has skyrocketed.

Pity Domino’s Pizza whose Conover NC franchise employed two of the stupidest thirty-somethings available. They posted a prank video on YouTube (it’s been removed) that burned through the social media world faster than any recorded wildfire and was just as damaging.

In a 2007 post I quoted Chris Gidez, head of U.S. crisis management for the public-relations firm Hill & Knowlton, “Once it’s on the Web, it’s like taking the rods out of a reactor. Companies have to work harder to determine, ‘Do we need to worry about this?’ “Overreacting can call more attention to a rumor than it gets on its own, I’ve had clients who wanted to respond to a problem with guns blazing, and I say, ‘Hold on a second. You might be telling a larger universe of people about a problem they didn’t know existed.”

I think that Gidez may be giving different advice these days, since it’s doubtful that any rumor, prank or sin will die a natural death.

“If you think it’s not going to spread [in social media], that’s when it gets bigger,” said Scott Hoffman, the chief marketing officer of the social-media marketing firm Lotame. “We realized that when many of the comments and questions in Twitter were, ‘What is Domino’s doing about it’ ” Domino’s spokesman, Tim McIntyre said. “Well, we were doing and saying things, but they weren’t being covered in Twitter.”

By Wednesday afternoon, Domino’s had created a Twitter account, @dpzinfo, to address the comments, and it had presented its chief executive in a video on YouTube by evening.”

The real problem today isn’t the speed and transparency with which information moves, but rather it’s that the stupidity factor is just as bad, if not worse, than it ever was.

Dr. Jay Geidd, NIH: “The part of the brain that fills in last is the part involved in decision-making and controlling our impulses.”

The articles on teen brain research all indicate that the brain matures around age 25 or later, but it seems the availability of instant fame, no matter how fleeting, has pushed brain maturity way past that mark increasing the level of stupidity that people find so amusing—think YouTube and AFHV.

This weekend talk to your kids. Show them the article; tell them about the legal charges filed and the civil suite in the works. And ask them what business in it’s right mind would ever hire people whose judgment is this bad?

Image credit: John Karakatsanis on flickr

Now learn what an open door culture really means!

Image credit: bertboerland on flickr

Economic pundits, eagerly searching for signs of the recovery, are grasping at almost anything. “The rate of decline has slowed.” “Unemployment has stabilized.” “The cardboard box index has bottomed out.” And the shape of the recession and recovery has been predicted to be a V,  W,  L, or even a double-bounce W.

I think they’re all wrong.

The old economy will never come back.

This economic meltdown is much like a forest fire. After the fire burns itself out, the storm may be over, but the burn area is fundamentally changed. It does not “bounce back.” It starts at a different place.  Sometime in 2010, the economy will stabilize, but it will not “come back.” We will go forward from a fundamentally different position. This new starting point will reflect the impact of deep, long-term, global trends in the nature of work, the value of the dollar, and our relationship to our government. The current recession is a convenient marker to recognize these trends.

Work Is Changing

The nature of employment will continue to change. The United States will continue to shift to a “just-in-time,” service-based workforce. The manufacturing sector will continue its decline, from 29% of GDP in 1950 to 15% in 2000 (see analysis by Dr. Mankiw). It will drop below 10% by 2010. You can construct your own labor trend at indeed.com. ( This website is a fascinating example of the business of data, which we discussed in the last three posts.)

Many new service-sector workers will be involuntary. Growing unemployment and under-employment in the United States (which will exceed 15% this year) is driving many people into self-employment as service workers. An analysis of Japan’s Lost Decade by Tom Coyner, long-time resident of Japan and Korea, provides one instructive example of this phenomenon, and some associated risks.

These new service sector workers will be driven to a “do-it-yourself” model for almost everything. They will have to provide their own health care plan, retirement plan, office arrangement, and business planning. Many of these workers will be home-based, with little differentiation. The most common product/pricing model will be piecework, with unit pricing based on the alternative of being completely idle. Ironically, one result will be the re-integration of work and home life.

Entrepreneurship is Changing

Investment capital will no longer be available for any but the most solid businesses; and the vast majority of these newly-independent service workers do not have plans to build large businesses. As a result, the successful ones will exhibit four common, positive characteristics:

Local—In a global world, being present still counts. A local service provider who can show up in person has a distinct advantage. In addition, some services simply cannot be outsourced. When your car is broken or your roof leaks, you need a local service person. For locally-based services we may see an increase in a local, personal relationship with service providers.

Immediate—Without investment capital to fund long-term research and development, independent service-providers and small businesses must focus on services that provide immediate value. The “cash-to-cash” cycle must be less than one pay period. Fortunately, credit/debit cards and other immediate payment methods support this trend.

Information-based—Information will provide significant improvements in service quality and competitive differentiation. For instance, simply finding a customer is difficult and expensive. Irritating prospects with unnecessary and unwanted sales promotions is also costly. Successful service providers will use information to target customers on a “just-as-needed” basis.

Green—Setting aside the discussion of whether the earth is warming or whether green is good, government policies will reward green activities preferentially. Independent service providers will offer green services or enhance green aspects of their existing services.

Start-Ups Will Explode in Unlikely Niches

The availability of many talented people and the flexibility of independent service providers will fuel new start-ups. While these may not completely replace the loss of investment capital, they will certainly provide an alternative path of low-cost labor for new businesses. The change may be refreshing, for us individually, and for our economy.

This is perhaps the greatest unknown—how much will individual creativity and inspiration replace financial engineering.

I am hoping for a few delightful surprises ahead.

Data: Salt for the Information Age

Roman soldiers were often paid in salt; this was so common that the Latin root for “salt” and “salary” is the same – sal.

As important as salt was in ancient ages, just so is data in the information age. Data is the raw material for information. Just as salt improves food, today data enhances the value of products and services.

In the two previous posts we explored how “the data is the business.” For many information age businesses, the collection, maintenance and distribution of data is, in fact, the primary revenue source.

But, based on questions from readers, I’m not getting through, so let me spell it out.

Every business collects, maintains, and distributes data.

The better businesses use data to enhance the value of their products and service.

The smartest businesses use it to generate revenue directly.

There are only two types of Databases…

At a high level, databases collect information about only two things – population identities or activity trails.

For instance, the company accounting system may be the original business database.

• The balance sheet is a database of population identities – how many dollars in cash, accounts receivable, inventory, accounts payable, bank debt, equipment, and owner’s equity.
• The income statement is a database of activity trails – what was the activity in sales, in collections, in payments.

The accounting system integrates these two databases into a unified view of the entire financial situation for the company.

The Census Bureau is the granddaddy of population identity databases; others include Monster.com (resumes), Dun & Bradstreet (small companies), Hoovers (public companies), MarketWatch.com (mutual funds), Google (websites and search words), to name just a few.

Databases of activity trails are just as common: stock price websites (stock price activity over time). FedEx, UPS and other shipping companies offer activity trail databases for every package they ship.

Of course, just like the accounting system integrates population identities and activity (audit) trails, the most powerful databases integrate population identities and activity trails. See if you can think of five or ten more.

There is really only one type of Database that really matters—yours

This is the key point. Your company already collects population data and activity trails for every product and service you sell. You have a database of all the products and services for sale (the sales catalog) and a number of databases that support those products—bills of material, inventories, historical demand, price histories, revisions, replacements, and a cluster of support products and services.

Your company also has a natural user and customer base for the data you collect. Customers, suppliers, service partners, and competitors all have a great interest in that data. So here already are the beginnings of a data business—a database and potential customers for that data.

A Few Small Bumps

Externalizing a database can be a significant challenge. It’s worth investing some time and even a few dollars in developing strategies for these key issues before rolling out your new business. A little planning and caution in building a good foundation will pay handsome rewards later.

Operational Concerns

Who owns the data? Does your organization have clear, unambiguous title to the data? For instance, are prices negotiated as confidential in certain supply and delivery contracts? If ownership is not clear, then how can you anonymize the data to honor the agreements? Can you change the agreements so that your ownership is clear?

How is the data refreshed? Data gets old. As the database grows data maintenance rapidly grows and soon exceeds data collection as the primary challenge. Some companies, such as D & B and Hoovers, use an army of employee agents to check and update the data.

Historically this approach worked, but the scale of modern databases has rendered the “internal data army” impractical. Consider two other approaches

• automation and a
• user community.

Automate the data collection and refresh. Google uses automation to refresh its database of websites. By some estimates Google has several million computers (really just CPU data blades) crawling the web to update its website database. Many other databases receive data feeds periodically from their sources. For instance, foreclosures.com gets feeds of foreclosure information from almost every county in the United States. The conversion and translation must be a nightmare, but the resulting database is incredibly powerful and a great business.

Motivate the user community to collect and refresh the data. With the emergence of web 2.0 and social networks, many companies are creating and using a user community to do data collection and refresh. YouTube.com, MySpace.com, Facebook.com, and LinkedIn.com are good examples of social network databases created and refreshed by user communities. Wikipedia.org, Jigsaw.com, and credit reporting agencies have created or adapted user communities specifically to provide business data. Travel websites such as Expedia.com use both automated data collection and business user communities to collect and present their databases of airline and hotel prices.

How do users access the data? Online access is rapidly emerging as the only method to sell data. Intermediated purchases, which require you to process the purchase request, are simply too expensive. Customers want instant access. Put the database online and develop search/selection capabilities that allow customers to find exactly what they want.

How do users pay for the data? A la carte or by subscription. Subscription is emerging as the preferred approach, both for data suppliers and data consumers. Tiered subscription access appears to be acceptable, so long as it is not too complicated.

Legal Concerns

The law on ownership and distribution of data is under construction. Quite simply, these are brand new businesses—often there are no regulations, limited historical precedents and even more limited applicable case law. And since the web is global, multiple national laws may apply. It’s complicated, so invest heavily in the two basic legal agreements—Purchaser Agreement and Contributor Agreement – to protect your company and your data. Limit your liability and do not compromise on your exclusive ownership. Others have found that shared ownership is simply an invitation to an ongoing dispute.

There is Wisdom in Metadata

If the data is the salt for the information age, then metadata is the spice. “Best selling, fastest growing, most popular, most expensive, Top Ten and cheapest” are all metadata lists generated from databases.  What trends are hidden in your databases? What trends do your customers and suppliers track?

Track the trends in database businesses to identify the best opportunities for your company.

Again, please feel free to call me at 925.858.9017 or email rbarrett@one-one.net for clarification on any points.

Hope to see you in the Top Ten New Database businesses soon!

Back in the late 20th century the business model for dot-com businesses was “Attract the eyeballs (website visitors), and the business will follow.”

Many businesses executed that model, such as AOL, FlyFishing and an embarrassing host of others, almost all gone by now.

Over time the model of attracting eyeballs simplified to Google—just Google.

Since then Google has created an effective advertising model for websites that attract eyeballs. It’s called AdSense, and the model is very simple.

Attract a large number of visitors (eyeballs) and Google will monetize those visitors through its AdSense advertising program. Google selects ads that match the profile of visitors to your website, posts the ads on your site and shares a portion of the ad revenue with you.

Google keeps all the control and can limit your revenue.

Social networks and blogs are perhaps the poster children for this Adsense business. Social networks such as LinkedIn, Facebook, and MySpace generate revenue primarily from advertising.

The community creates the content that attracts the eyeballs, and the eyeballs attract the advertisers.

Blogs are only a little different. For a blog the author creates the content, rather than the community. But after this, the model is the same. The content attracts the eyeballs, and the eyeballs attract the advertisers.

Write a compelling blog and the eyeballs/advertisers will come.

Unfortunately this is a model for a lifestyle business, not a long-term business. Over time the competition increases and Google lowers the payout, so the revenue decreases.

Is there an alternative to the model of ever-declining revenue from Google Adsense?

Yes, create some old-fashioned value from the data itself.

The Data is the Business

Last week I discussed the concept of creating business value by collecting and selling data. That is a good alternative to the Adsense advertising model:

Create value in the data.

The benefits of a data sales business model are compelling:

• Low start-up costs. Use the cloud for your computing and storage. Google and others offer free access for applications with small bandwidth demand.
• Easily scalable. Add storage as the database grows. Add bandwidth as customer demand grows.
• No delivery cost – the user shops and selects and takes delivery online.
• Minimal cost of goods sold (COGS). This really depends upon your data collection model.
• Immediate global access and delivery.
• Captures the value of the “long tail.”
• Relatively easy to protect. Compared with code, a database is easy to protect.
• Even the meta-data (data about the data in the database, e.g. statistics) has value. Think of the top 10 lists, such as the “most popular search phrases” that Google publishes.

But if this business model is so good, why isn’t everyone starting a data sales business? Maybe they are…

Join me next week when we discuss what type of data sells.

See you all then.

Alexander Kjerulf over at Chief Happiness Officer shared a fascinating write-up (one of the case studies for his new book) about Wim Roelandts, CEO of Xilinx, managing through his eighth recession. During 2000 recession Wim decided there was a better way than the standard Silicon Valley of repetitive rounds of layoffs—and he proved there was. He called his strategy “Share the pain;” it was completely voluntary and 2799 out of 2800 employees opted to take the graduated pay cuts. He held fast in spite of opposition from both his Board and Wall Street analysts and it worked.

Next is a new book by Dave Hitz who co-founded $3 billion NetApp, number one of Fortune Magazine’s 100 Best Companies To Work For. How To Castrate A Bull & Other Corporate Survival Tips looks like a great read. Enjoy!

Last but certainly not least are two takes on Tony “A company’s culture and a company’s brand are just two sides of the same coin” Hsieh, the guy who built a billion dollar company on its culture. Both are takes on his keynote talk at SXSW 2009, but bring out different points. The one from Fast Company includes seven steps to incorporate Zappos core values into your company; the other is The Onion’s Baratunde Thurston via CNET.

Have a wonderful weekend!

Image credit: flickr

The medium is the message. –Marshall McLuhan, 1964

The network is the computer. –John Gage, VP, Sun Microcomputer, circa 1982

The data is the business. –Richard Barrett, 2009

Previously I reviewed some aspects of new business models that are emerging to accommodate new employee-employer relationships.

Business models are also changing in response to many factors. In this post we will explore business models where “the data is the business.”

In these models, the underlying data has become as valuable, or often even more valuable, than the product or service itself. While it sounds a little odd, these examples amply demonstrate the considerable value of the data itself. In some cases the data is the product, but in other cases, the data is ancillary to the service and only over time did the supplier begin to understand the value of the data, and then to package, promote, externalize and even sell the data itself. A few examples:

Package Shipping and Supply Chain Logistics

FedEx pioneered overnight delivery, but quickly discovered that customers really wanted proof of delivery even more than overnight delivery. Proof of delivery (POD) has perennially troubled the shipping industry; the receiver claims the packages have not arrived and the shipper says “Yup, we delivered it”—leaving the sender in the middle with neither the product nor the payment. After being swamped by POD requests, FedEx went online with its package tracking service. Now you can watch your package move through the FedEx system—its location recorded by scanners at each stop in the delivery chain.

Soon after, UPS and the entire shipping industry followed suit. Shipment tracking has become a cornerstone of the supply chain (logistics) management industry, leaving suppliers no place to hide except in their all-to-visible performance.

The Power Grid

Companies producing and delivering electric power have long since mastered the ability to track and measure the performance of their production and distribution systems with SCADA (system control and data acquisition). Now they are installing smart meters which can not only track power consumption minute-by-minute, but can report it back to the company SCADA system through an internet system on the electric power lines. Soon they expect to impose “time-of-day” pricing to capture the value of power demand during peak times.

Solar City, a regional installer of solar power systems in the southwest, offers a performance monitoring service to each of its customers for a small fee. The monitoring service not only tracks system performance, but eventually will have the capability to reconcile power production with credits from the electric company purchasing the power. Solar City charges its customers for this data collection and monitoring service as part of a comprehensive maintenance package. Within a few years Solar City expects the database of solar power production to have significant value to power companies themselves and other agencies interested in tracking aspects of green power.

Tracking Consumer Preferences

Many companies make a business from tracking and measuring consumer preferences. AC Nielsen, now Nielsen Media Research, started tracking the habits of radio listeners back in 1942.

Today Alexa Web Information Service and others track website traffic for millions of websites.

A Tale of Two Databases

Jigsaw Data Corp has harnessed a social network to create its database of business contacts, which Jigsaw then sells to business contact consumers such as marketing departments. With a database of over 12 million contact records (really complete business cards) Jigsaw cannot even begin to keep each contact record up to date much less to continue expanding the database. Instead, Jigsaw has developed a network of over 300,000 contributors, who earn points by adding to the database and updating individual records when a person changes a job, or telephone, or title, or email.

Of course, the mother of all data businesses is Google. Its AdWords business, tiny paid ads displayed in the right-hand column in response to a user’s search words generates well over 90% of Google’s revenue. The AdWords process is amazingly simple. The power comes from harnessing the search-word data and tracking the click-thru performance of each AdWord.

Incorporate Data In Your Business

Does your company collect data in the normal course of business? Of course it does. That data has significant value to the right audience. Consider these questions to make a business out of your business data:

• What data do you collect from customers, suppliers, partners?
• How can you develop the data collection into a fee-based service?
• How would another business use that data?
• How can you package your data for consumption by others?

As you contemplate selling data you will encounter a host of questions regarding original ownership, distribution rights, payment models, privacy, and protection. But when you have created valuable data, building the data business will provide years of fun, challenge and profit.

Let me know how your team is making a business out of data. Ask your questions here or you can email me directly at rbarrett@one-one.net.

Here’s to your new (data) business,

2008 – RIP Investment Capital.

The significant reduction of investment capital ranks as one of the major challenges affecting businesses in 2009. While 2008 may be the year that investment capital evaporated, we are only now learning to live with the loss.

The drought in venture capital has been well documented, with only seven venture-backed companies completing IPO’s in 2008, generating a meager total of $551 million in liquidity (Dow Jones VentureSource). Liquidity through acquisition also fell, by 50% from 2007, both in total dollar volume and in median price paid. In 2009 venture funding will be both smaller and more difficult to close.

Start-up funding from other sources, such as angels investors and friends & family has also plummeted, in direct relation to the decline in the stock markets. Bank credit, either from loans or from credit cards, has shriveled.  This deleveraging will become a permanent part of the economic landscape, for the next decade or longer.

Business Models for the New Decade—Small is Beautiful

In response, many small businesses are exploring new business models that do not depend upon external investment capital and long time horizons for liquidity. While these models are only beginning to emerge, a few trends are already evident:

• Immediate cash flow—without investment capital, cash generation becomes critical. The criteria for business investment shifts from total ROI to payback period, measured in weeks. New business models will generate cash almost immediately.

• Small scale—Scalability has lost its luster. First, there only limited investment capital to fund infrastructure for scaling. Second, the pressure for immediate cash flow shortens the window for investment in scaling. Third, the value of scaling is much lower when the traditional exits—IPO and M&A—are reduced.

• Multiple revenue streams—in the current risk-averse environment, multiple cash streams have strong appeal. Multiple streams can create challenges with business focus, but the combination of smaller scale and overwhelming drive for cash flow can help to keep the organization on track.
• Linked, but not integrated—Linkage generates benefits to the organization, but preserves flexibility and maintains focus for each individual cash stream. Tight integration, often a requirement for scalability, needs more capital and a longer time frame.

• High dependence on the owner/operator—this is a significant diversion from the venture capital business model, in which the investor/owner becomes a central actor in the success of the company.  In the venture model, the entrepreneur develops and prototypes a business concept, then raises venture capital. At some point, the venture owners often replace the entrepreneur with a “professional manager” to grow the company into an acquisition candidate, or rarely into an IPO. Then the “IPO executive” steps in to provide the leadership to close the acquisition or acquisition. Note that the venture investor / owner, not the entrepreneur, provides the continuity in this model.

Example—Building Contractor Reorganizes for Multiple Revenue Streams

The Texas building contractor we met in the last post refocused his business on restoring foreclosed houses owned by banks when financing for new home developments dried up. He targeted small investors searching for cash flow from rental properties. Then he assembled several small service teams to deliver a complete package to rental property investors:

1. house acquisition and restoration,
2. mortgage lender,
3. property manager, and
4. long-term maintenance service. Each team is a separate company and a separate revenue generator with a separate revenue source.

Two threads link these companies economically. First, they all focus on a specific type of customer—a private investor in small rental properties. Each company provides a separate service, but all the services are necessary to offer a complete solution for the customer. Each individual company succeeds better when the entire group succeeds. Second, each company owner has some ownership in the other companies. As a result, the companies are more than just mutual suppliers to the customer. From the customer’s viewpoint they function as a single operation. They are linked, but not integrated.

Build Your Business for Life—Not for the “Exit”

This is perhaps the single biggest change in the emerging business model.

There is no exit.

This is not a threat from Jean-Paul Sartre, the author of the depressing existentialist play No Exit. Rather it is the opportunity of a lifetime. The entrepreneur is a business owner for a long time, even for a lifetime. The rewards for building and owning the business must directly from the business. Any financial rewards come from a stream of profits generated by the business. Any personal rewards in satisfaction come from the business itself. This new model, surprisingly, leads us back to the roots of entrepreneurship.

Do something because you love it.

The rewards will come to you.

I read an article by Dev Patnaik that talked about the success of innovation with empathy vs. innovation without it. I found the examples used (Microsoft’s XBox and Zune) to be unimpressive in getting the point across, but it reminded me of two old (2006 and 2007) posts of mine.

Patnaik writes that “empathy is the ability to see the world through the eyes of another person. Unless new products or services connect with the lives of real people, design or marketing can’t do much to make them succeed.”

I’m always behind on trendy terms such as empathy, so I looked at the same issue through the lens of assumptions.

Here are both posts…

Assumptions are bad

Assumptions. They’re bad for your health, wealth, business and all human interactions. I’ve previously written about how they influence the workplace, but I saw a story this morning that really tickled me as proof of how costly assumptions are to businesses and entire industries.

The article is about how the bike industry found a way to revitalize a falling market with bikes that automatically shift gears. Here’s what caught my eye, “Shimano spent several years figuring out why ridership has decreased, and realized people wanted to ride for fun…The company was shocked to realize its efforts at making newer, more high-performance bikes weren’t winning over new riders.”

“We come to find out these people not only don’t want high performance, they don’t even care about it.”

Notice the final words, “they don’t even care about it.”

The assumption that high performance was critical came from people in the industry—people most likely to be classed as avid cyclists and to whom performance was a key issue, and that assumption was generalized to the entire population.

It’s always that way. Every time someone finds that their belief/attitude/assumption isn’t held by everyone, or at least by the specific group they’re focused upon, they are amazed and even shocked.

How many times have you read an article, such as the one above, and your reaction was, “Well, duh!” That was my reaction to the amazement expressed when performance didn’t matter to the general public.

“Duh,” is my reaction to my own assumptions when they get in the way of my human interactions.

And “Duh,” is my very silent reaction to many of the assumption-based management quandaries I deal with every day—also the managers’ reaction, not silent, once they identify it.

Assumptions And Innovation

Following up on my previous post about how the assumption that performance was the most critical buying issue in cycling helped flatten an industry, comes yet another example of how assumptions lead astray.

The new generation of game consoles from Sony and Microsoft focused on the brilliant graphics demanded by game enthusiasts, but Nintendo is creaming its competitors by looking past graphics and focusing on fun. “Jesse Sutton, interim president and chief executive officer of Majesco, says Nintendo is targeting its hardware at the fastest growing audience in the games business — “casual” gamers who are more interested in fun, simple games rather than the deeply immersive titles that most hard-core gamers prefer.”

Hmm, sounds similar to the people who want to have fun riding bikes.

The car industry is learning the same thing. First, when Honda’s Element and Toyota’s Scion, designed as inexpensive first cars for teens and 20-somethings, got snapped up by their parents, who wanted inexpensive, fun transpiration, instead of performance and mind- and wallet-numbing electronics.

That challenge is being upped again by India’s Tata Motors, which plans to bring out a $2500 car in 2008. And this isn’t just about lower income, emerging markets. “To automakers’ astonishment, cheap cars are also proving to be just as popular in established markets as they are in the developing world…The new generation of cheap cars will be sturdy and reliable and will appeal to Western consumers who want to spend money on things other than transport… The shift to cut-rate wheels is jarring for an industry that has fixated for at least a decade on premium cars…”

The same awakenings have happened/are happening in consumer products, such as soup and cleaning products.

Other industries are climbing on the bandwagon. Even software companies are recognizing that most of their customers aren’t twenty-something programmers and that they don’t want to “work under the hood,” they just want to do whatever it is that they bought the program to do.

What these stories have in common are the assumptions that guided product development came from industry/product aficionados—hard-core devotees who designed products for people like themselves—and ignored the rest of us.

Finally, companies are figuring out just how large the so-called casual market is, how much money it has to spend, and that it’s a giant market anywhere you look for it.

For managers, the lesson is to avoid assumption-myopia by building a team with different backgrounds, varied experience from different industries, and a solid generational mix.

Do that and you’ll have a lot more innovation outside the box.

In times of economic chaos such as now, it’s a wise company not only listens to its current customers, but also broadens its focus to include the “casual” part of its market.

Image credit: flickr

The great thing about this this blog is that I have the luxury and pleasure of taking a longer view in one of the most turbulent economic times since World War II over fifty years ago, as I’ll be doing over the next few weeks.

Globally, we are seeing seismic shifts in trade flows, financial relationships, business fundamentals, and the balances between people, governments, and business. In many ways we are corks bobbing about in these economic tidal waves.

However, we are corks with intelligence and capability. While we cannot change the tidal waves, we can and should understand them in order to improve our own lives and the lives or our co-workers and friends.

A long view can provide understanding and perhaps some enjoyment in the understanding. But  it is also valuable to connect that long view back to the here and now, to address the question “What do I do about it?”

In this article I address the fundamental shifts occurring in employment models in the United States, tracing the roots of the “lifetime” employment model that emerged in the aftermath of World War II. That model has crumbled and the new models are only now appearing.

Tying this long-term trend back to today, we look at two companies pioneering new employment models.

The Old Model—Lifetime Guarantees

Since World War II large US companies offered an amazing, lifetime employment agreement to their workers. This lifetime agreement had three planks:

• Lifetime employment at the same company
• Lifetime health care
• Lifetime retirement

Following World War II, the United States represented only about 5% of the world’s population, but controlled over 95% of the world’s economic activity. The economic infrastructures of Europe, Russia, and Japan had been destroyed. These countries had also lost almost an entire generation of young men, further crippling their economic activity and recovery.

American companies competed only with each other, and completely dominated the global economic landscape. Several factors—tax structures, unions, and a very limited government—led companies to take over the responsibility for health care and worker retirement planning. Since American companies competed primarily with each other only, they could offer the “lifetime employment” agreement mentioned above.

Today the world has changed. The United States still represents about 5% of the world’s population, but controls only about 25% of the global GDP. American companies compete with the

• EU, where governments have taken over the responsibility for health care and retirement, and
• emerging countries, where no one takes responsibility for the workers’ health care and retirement.

American companies can simply no longer afford to offer the three benefits of lifetime employment – job, health care. Some new models are emerging, but they themselves will change as the global economy continues to shift.

The New Model—Just-in-Time Workers, Do-it-Yourself Benefits

The new employment model is just-in-time, do-it-yourself. Companies now acquire workers just-in-time, shifting their employment burden to independent contractors and outsource service providers. Workers, even the direct employees,  are responsible for their own healthcare and retirement planning. Indirect payroll costs for direct employees will climb significantly in the next ten years, so companies will continue to reduce their direct employee base and increase their use of contractors and outsource providers.

Example—Building Contractor Restructures for Cash Flow

A Texas building contractor I’ll call TexHomes provides a good example of a “new model” small business. In this post we will focus on his employment model, saving the business model for later discussion.

TexHomes sharpened the company’s focus on restoring foreclosed houses—traditional single family residences, typically restoring about 50 homes each month.

With the sharpened focus, TexHomes needed fewer subcontractors, primarily painters, carpet layers, and maintenance people. With the steady volume and a smaller number of subcontractors he experimented with direct employees, planning for improved control.

But the costs and paperwork escalated rapidly, and the company lost considerable freedom in other areas (retirement contributions, health plans, vacations, etc.). So the company switched back to a subcontractor model for almost all of its workers, even though it provides them with full-time work. Currently the company has a very tight work team:

• Employees – 3 people. CEO/owner, Business Manager/co-owner, Accountant (CEO’s wife)
• Independent Subcontractors – 12 people. All the trade workers are independent subcontractors.
• Outsourced Services – every other function. The company uses an independent accounting service, an independent HR service, and independent maintenance service for all company equipment.

With only three direct employees, this company qualifies as a small business, thus reducing its regulatory compliance burden. In addition, the company operates from a home office, further reducing its operational expenses. Since the three direct employees are also owners, the company can coordinate employee benefits to maximize total cash flow to the owner/employees.

The company generates over $20 million in annual revenue with a pre-tax profit margin exceeding 35%. While it may be a small business, it generates considerable cash for its owners and workers.

Unlike the construction industry, many businesses do not have a long tradition of independent subcontractors. However, you may want to consider how you can apply some of these lessons to your business.